IMF sounds alarm on premature rate cuts, claiming global economy is at risk

The International Monetary Fund (IMF) warns against central banks cutting interest rates due to a larger risk to the global economy if they move too quickly

Managing Director of the International Monetary Fund (IMF), Kristalina Georgieva, issued a warning against central banks cutting interest rates in a statement on Thursday. The future IMF research, she said, indicates a bigger risk to the global economy if central banks move too quickly to prevent any more delay—the latter amounting to a very small one-time correction.

The recent phenomenon of a spike in prices as a result of the post-pandemic has seen most of the global central banks, including the US Federal Reserve and the European Central Bank (ECB), keep high-interest rates. Now, as the inflation rate is already beginning to slow down in many of the leading developed and developing economies, the question is when these central banks should consider reducing rates so as to promote investment and stimulate economic expansion.

In her briefing at the IMF headquarters in Washington, Georgieva touched on the need to be data-driven in decision-making. “Our team went back in history, and the result of that they came up with is that the risk of early easing is outweighed by the risk of being slightly behind,” she said. Georgieva advocated for central banks to maintain a watchful eye and act in line with the given information.

This was a response to the latest US Federal Reserve move to retain an unchanged interest rate. Responding to rhetorical questions from reporters, Fed Chair Jerome Powell dismissed the likelihood of an interest rate cut in March, prompting a downward spiral of the majority of stock prices on Wall Street.

European Central Bank President Christine Lagarde earlier this week conveyed confidence in the cuts coming but was mum on the date to be followed.

Georgieva, in addition, discussed the economic path of the United States, indicating that the country was heading towards ‘a’soft landing’. “We are poised for soft landing, it’s not done,” she said. “You’re still 50 feet above ground and we know that until you land it’s not over.

Source: AFP